* Olivia Williams, Anne-Marie Jacks. Jim Davis. Sabrina Martinez, prepared this
case under the supervision of Professor Allan Afuah as the basis for class
discussion rather than to illustrate either effective or ineffective handling of
an administrative situation. Proprietary data have been disguised, but key
relationships are preserved. The authors have taken poetic license with the
characterizations made in the setting of the introduction.

Case 10: Merck(A):
Mevacor*

CEO Roy Vagelos stood in his corner office sipping a scotch and soda as he
looked down on the 1991 Holiday party in Merck's Rahway, NJ headquarters. He
could sense the excitement in the air as his employees celebrated not only the
holiday season, but also the recent FDA approval of Zocor, Merck's second
cholesterol-reducing drug. However, Vagelos could not fully share in the
revelry. On his mind was the success of Merck's first cholesterol reducer,
Mevacor, which was currently a phenomenal product with sales in excess of
$1 billion. He knew that Zocor was a more potent form of Mevacor
and was excited about its potential. Yet, he could not help but wonder how
launching Zocor would impact Mevacor's success in the market.

History of Merck

Merck was established in 1887 when chemist Theodore Weicker came to the
United States from Germany to establish an American branch of E. Merck of
Germany. George Merck, the grandson of the German company's founder, partnered
with Weicker to import and sell drugs and chemicals from Germany. In 1903, the
firm opened a plant in Rahway, NJ to manufacture alkaloids. One year later,
Weicker sold his shares to Merck and bought controlling interest in a
competitor, Squibb.

In 1927, Merck merged as a producer of antimalarial quinine, and it
established its first research lab five years later. During the 1940's and
1950's, five Merck scientists received Nobel Prizes. In 1950, George Merck made
the following statement about the values of Merck that continue to drive the
company:

"We try to remember that medicine is for the patient. We try to never forget
that medicine is for the people. It is not for the profits. The profits follow,
and if we have remembered that, they will never fail to appear. The better we
have remembered that, the larger they have been.

By 1976, CEO John Horan had redoubled Merck's research efforts despite a dry
spell of no new drug production for nearly 10 years, costing the company $500
million. Horan hired bio-chemist Roy Vagelos to head up R&D in 1975. Ten
years later, Vagelos was promoted to the office of CEO.

Transformation of R&D under Vagelos

In 1975 Vagelos recognized the high-risk financial endeavor of pharmaceutical
research. He realized that bringing a new medicine from discovery to marketing
requires up to 12 years and costs at least $359 million, and that only 3 out of
10 drugs fully recover the costs of their development. Exhibit 1 outlines the
steps required for a drug to meet FDA approval.

Coming from Washington University's School of Medicine, Vagelos had no
experience developing commercially viable drugs. He was immediately struck by
the opportunity to influence the course of medicine with the drugs Merck could
produce. Despite analysts' assessments of Merck's research growth potential as
quite limited, Vagelos insured that Merck's commitment to research never
faltered.

Financial constraints drove Vagelos and his research scientists to redirect
their efforts. Rather than hedging their bets by working on multiple projects
simultaneously, Vagelos required the research groups to prioritize their work
based on a few criteria. These criteria were areas in which:

1) there were no therapies available

2) science was advanced enough to allow them to make a breakthrough

3) they had enough knowledge of the disease to have an idea of how to arrest
it

Although Vagelos realized that it was very difficult to know early on whether
or not a project would succeed, he knew that these criteria would help them to
focus their efforts by immediately determining which projects to drop.

Vagelos also required the research groups to engage in an approach known as
rational drug discovery. Rather than randomly screen compounds and test for
pharmacological activity, Merck focused on creating specific molecules to attack
specific molecular targets. For example, knowing that many of the best drugs
available (i.e. aspirin and penicillin) were enzyme inhibitors (meaning that
they block the action of particular enzymes in the disease process), Merck
adopted enzyme inhibition as the major approach to drug discovery and
development. Merck was the only company at the time to take this approach;
however, today all pharmaceutical research employs the rational drug discovery
methodology.

Vagelos struggled to instill this focus both as the head of R&D and as
CEO. Because the development of any given drug involves years of research and
millions of dollars, Vagelos noticed that people were unwilling to push
development on the chance that the project would be shown to be a failure. He
commented,

"In the life of each drug-development project, there is always a crisis, a
moment when it looked like years of research will go down the drain and the drug
will never come to market. There are a million ways to fail in this business. We
scientists flirt with each and every one" (HBR, 11/94).

The pursuit of a drug that would lower abnormally high cholesterol by
blocking the enzyme that controls its production was the first test of Vagelos'
rational drug discovery methodology. The results of this effort were Mevacor
and Zocor.

Development and Success of Mevacor

Mevacor (generic name lovastatin) was FDA approved on September 1, 1987. It
is the first successful member of the HMG Co A reductase enzyme inhibitor family
of cholesterol drugs. Mevacor is a natural substance isolated from a
strain of the fungal microorganism Aspergillus terreus. It is prescribed
to patients with elevated total and low-density lipoprotein (LDL) cholesterol
levels when the response to diet restricted in saturated fat and cholesterol and
to other nonpharmacological measures alone has been inadequate.

How Mevacor works

In the liver (which produces 70% of the body's cholesterol), the HMG Co A
reductase enzyme converts Acetyl Co A to mevalonic acid (from which the name
Mevacor is derived), and mevalonic acid is subsequently converted into
cholesterol. Mevacor works to reduce cholesterol by inhibiting this first
step: it inhibits the HMG Co A reductase enzyme from converting Acetyl Co A to
mevalonic acid, thereby curtailing the overall production of cholesterol.

The development of Mevacor

According to Vagelos,

"The history of the discovery and development of [Mevacor]
illustrated well the interdependence of basic and applied pharmaceutical
research, as well as how long, tortuous, and risky the pharmaceutical
discovery and development process can be" (Science, 5/91).

Mevacor is the result of more than 35 years of work of
scientists both in and outside of Merck. In the early 1950's, Jesse Huff and his
associates at Merck began researching the biosynthesis of cholesterol
(eventually outlining a more than 25-step process), building on the efforts of
colleagues outside of the company. In 1956, Karl Folkers, Carl Hoffman, and
other Merck scientists isolated mevalonic acid in a yeast extract, and Huff and
his team demonstrated that mevalonic acid could be converted into
cholesterol.

Since the HMG Co A reductase enzyme (which converts Acetyl Co A to mevalonic
acid) had yet to be discovered, the significance of the discovery of mevalonic
acid was not realized in 1956. Thus, Merck redirected its focus to the bile
acid-binding resin, cholestyramine, which was discovered in 1957. Cholestyramine
works to indirectly reduce cholesterol by forcing the body to draw on its
cholesterol supply to make more bile acids. Cholestyramine soon proved to be
only marginally effective and was accompanied by unpleasant side effects and
difficulties in administration. Merck therefore licensed it to another
manufacturer and continued to research a better solution.

The HMG Co A reductase enzyme was discovered in 1959 by researchers at the
Max Planck Institute. Through the 1960's and into the 1970's, Merck joined
scientists around the world in trying to isolate a compound which effectively
inhibited this enzyme. The first such inhibitor, compactin, was isolated from
yeast cultures in 1976 by Akira Endo in Sankyo, Japan. In February 1979,
Hoffman, who had been a part of the team which discovered mevalonic acid 23
years earlier, and his associates isolated Mevacor from a strain of the
fungal microorganism Aspergillus terreus, and in June 1979 Merck filed
for a United States patent.

Mevacor next faced a major obstacle on its road to FDA approval. In
September 1980, Vagelos decided to discontinue clinical trials due to rumors
(which have never been substantiated) that Endo's compactin caused certain
cancers in dogs. However, in July 1982, the FDA gave Merck special permission to
give Mevacor to doctors at Oregon Health Sciences University and the
University of Texas who had asked for it to treat patients with severely high
cholesterol which had been unresponsive to available drugs. Mevacor
produced dramatic results with very few side effects in these patients, and
in August 1982, Vagelos reinstituted animal studies. Finally, on September 1,
1987, Mevacor was FDA approved for patients with high cholesterol levels
that could not be reduced by diet. The drug was later approved for marketing in
42 additional countries.

The innovative nature of Mevacor

Mevacor is the first successful HMG Co A reductase enzyme inhibitor,
and, more generally, it is the first successful drug to directly intervene in
the body's production of cholesterol. It is also the first cholesterol-reducing
drug of any type which is highly effective, well-tolerated with few side
effects, and conveniently administered.

Mevacor proved to be more effective than any other
cholesterol-reducing drug available in 1987. In clinical studies, it reduced
low-density lipoprotein (LDL) cholesterol levels by 30-40% and reduced total
cholesterol by 18-34%. Furthermore, it accomplished this without lowering the
body's high-density lipoprotein (HDL), or "good," cholesterol level.

By comparison, Warner Lambert's Lopid (generic name gemfibrozil) and
Bristol Myers's Questran (generic name cholestylramine), the top-selling
cholesterol reducers in the United States before the arrival of Mevacor,
work to break down cholesterol already produced and are known to be less
effective. Lopid increases the activity of the lipoprotein lipase, an
enzyme that breaks down the largest classes of lipoproteins: cholymicrons and
very-low-density lipoproteins (VLDL). Questran, previously mentioned as
Merck's discovery of cholestylramine, works by forcing the body to draw on its
cholesterol supply to make more bile acids.

Both Lopid and Questran are less easily administered via
ill-tasting oral suspensions compared to Mevacor's easy-to-swallow tablet
form. Lastly, Mevacor does not cause the side effects of these
competitors: Lopid causes stomach pain and upset and Questran
causes constipation.

Furthermore, Mevacor's success is the result of Merck's innovative
marketing.

Merck recognized that, by one estimate, 25% of the adult population has high
cholesterol, yet only 1 million are being treated. Specifically, Merck
recognized the millions of U.S. consumers who may be genetically predisposed to
high cholesterol as a massive, as-yet-untapped market for Mevacor.
However, Merck also realized that this potential market would be hard to
attain since (1) doctors are not apt to prescribe drugs to healthy people and
(2), as has been shown, other cholesterol reducers available at the time were
known to be only questionably effective and to produce severe side effects.

Therefore, Merck had to essentially create a market for Mevacor
through several major professional and public education initiatives as well
as through extensive advertising campaigns. For example, in 1987, Merck
undertook a national education program in collaboration with the American Heart
Association and the federal government's National Cholesterol Education Program.
In addition, Merck conduted cholesterol screenings in hospitals in conjunction
with Boehringer-Mannheim, a marketer of a cholesterol testing device.

Merck was the largest spender on advertising among pharmaceutical companies
in 1987, and in 1988, Mevacor and Miles Laboratories' Cipro were
the most heavily advertised pharmaceutical products. A large amount of the money
invested in Mevacor was directed toward a television commercial warning
the public about the dangers of high cholesterol.

The success of Mevacor

Mevacor had the highest sales ever of any prescription medicine in the
United States in the first 12 months of its U.S. marketing. While Merck did not
release Mevacor’s sales figure for 1988, analysts estimated it at $260
million. Furthermore, as of October 1988, Merck officials stated that Mevacor
had cornered 30% of all new prescriptions written for cholesterol-reducing
drugs. Exhibit 2 outlines Merck’s earnings compared to its competitors.

Development of Zocor

While developing and testing Mevacor in the 1980's, Merck was aware of
its competitors’ similar research into HMG Co A reductase enzyme inhibitors.
Specifically, Merck recognized the threat of Bristol Myers Squibb’s
soon-to-be-released Pravachol, based on Akira Endo’s 1976 discovery, as a
more potent cholesterol reducer than Mevacor. Therefore, along with
Mevacor, Merck had concurrently researched and developed Zocor,
which is a more potent, synthetic form of Mevacor. Zocor had been FDA
approved in December, 1991 and was ready to be released in 1992.

Now, while watching the holiday celebration, Vagelos reflected on the
critical decision he needed to make. Given the success that Mevacor had
brought Merck since its release in 1987 and given the increased competition for
this new class of cholesterol-reducing drugs, how should he allocate resources
between the marketing and distribution of Mevacor, and, in 1992, of
Zocor?